London, 04 August 2017 -- Moody's Investors Service, ("Moody's") has
today affirmed the Government of Albania's B1 long-term foreign
and local currency issuer ratings and the B1 foreign currency senior unsecured
rating. The outlook remains stable.
The decision to affirm the ratings and maintain the stable outlook balances
the following key rating factors:
(1) Progress on fiscal consolidation, structural reforms and institutional
capacity building;
(2) Structural economic challenges, despite improving growth prospects;
and
(3) A still high, albeit declining, debt burden with unfavorable
structure of domestic debt
Albania's long-term foreign currency bond and deposit ceilings
remain unchanged at Ba2 and B2, respectively. The local currency
bond and deposit ceilings remain unchanged at Baa3.
RATINGS RATIONALE
AFFIRMATION OF B1 LONG-TERM ISSUER AND SENIOR UNSECURED RATINGS
The decision to affirm Albania's credit rating takes into account
the significant progress achieved in recent years in terms of fiscal consolidation
and structural and institutional reforms. These support the current
rating by helping to reverse the damage to the government's balance
sheet caused by the financial crisis. However, offsetting
these positive developments are a number of credit challenges that continue
to weigh on the country's credit profile. These include the
still high, albeit declining, debt burden, still large
financing needs reliant on the banking system, and a small economy
with a narrow export base.
FIRST DRIVER: PROGRESS ON FISCAL CONSOLIDATION, STRUCTURAL
REFORMS AND INSTITUTIONAL CAPACITY BUILDING
The first driver for the rating affirmation is Albania's progress on fiscal
consolidation and structural reforms under the recently concluded three-year
IMF program, as well as progress in strengthening the quality of
institutions in pursuit of EU accession.
The government's fiscal deficit narrowed to 1.8% of GDP
in 2016 from 5.2% in 2014. Fiscal discipline has
been maintained through this electoral cycle and Moody's expects
the deficit to decline further in 2017-2018, supported by
expenditure rationalization, reduced energy-related payments
and a number of measures aimed at improving revenue collection,
an area where Albania still lags behind its regional peers. Fiscal
consolidation efforts have been accompanied by enhancement of the fiscal
framework through the amendments to the Organic Budget Law approved in
mid-2016 and other initiatives aimed at strengthening public financial
management. These measures include the new law on local finances
and procedures to monitor and address the build-up of potential
new arrears.
In particular, electricity sector reforms, implemented under
the assistance of the IMF and the World Bank, have improved the
financial position of electricity state-owned enterprises and have
reduced the negative spillovers to the economy and the government's
fiscal support to the power sector which, according to the IMF,
has fallen to a projected 0.1% of GDP in 2017 from 0.9%
of GDP in 2014.
Furthermore, the EU candidate country status granted in June 2014
has fostered progress on institutional reforms, accelerating the
path toward the start of the formal accession negotiations and improving
the prospect of further foreign investment as the business environment
gradually improves. Since achieving candidacy status, the
authorities have initiated a range of institutional reforms and in 2016
made significant progress through the adoption of a comprehensive package
of constitutional amendments to reinforce the independence, efficiency
and accountability of the judiciary. The European Commission views
the implementation of judicial reform as an important step to open the
accession negotiations. The country has also made improvements
in the fight against informal economy, corruption and organized
crime, exemplified by the adoption of anti-corruption action
plans.
SECOND DRIVER: STRUCTURAL ECONOMIC CHALLENGES DESPITE IMPROVING
GROWTH PROSPECTS
The second factor considered in the affirmation of the rating at B1 -
notwithstanding the improvements noted above - is Albania's
low economic strength, which balances improving growth dynamics
against small economic size, low competitiveness and relatively
low GDP per capita. Albania's low level of economic diversification
compared with its peers weighs on its credit profile. Agriculture
accounts for 23% of gross value added, while Albania also
has a narrow export base, with 50.5% of merchandise
exports destined for Italy.
Economic growth is supported by improvements in domestic demand and net
exports. Moody's projects real GDP growth to accelerate slightly
to 3.6% in 2017 and 3.8% in 2018 from 3.4%
in 2016. Nevertheless, being a small and narrowly diversified
economy, Albania remains exposed to external shocks, including
adverse weather, given the importance of the agricultural sector
and the country's reliance on hydroelectric resources. The
latter continues to pose a risk, albeit a diminishing one,
to economic growth and the fiscal position.
That said, the reform process toward EU accession, if sustained,
is expected to gradually improve competitiveness and the business environment
by strengthening the rule of law and property rights. These changes
should be conducive to further income convergence toward regional peers
in the coming years. Ongoing reforms in the energy sector and efforts
to diversify the country's power supply through greater access to
natural gas, with the Trans Adriatic Pipeline scheduled to begin
operations in 2020, are expected to increase the country's
economic resiliency to external shocks.
THIRD DRIVER: STILL HIGH, ALBEIT DECLINING, DEBT BURDEN
WITH UNFAVORABLE DOMESTIC DEBT STRUCTURE
The third driver is the still high, albeit declining, debt
burden along with still large financing needs reliant on a banking system
burdened by high non-performing loans (NPLs).
Although declining, public debt still exceeded 70% of GDP
in 2016, remaining above the pre-crisis level of 62.1%
of GDP in 2012 and significantly above the B-rated median of about
54% in 2016. Furthermore, despite making progress,
Albania continues to face fiscal risks, particularly from the electricity
sector due to its exposure to adverse weather conditions that can lead
to costly energy imports.
Despite declining considerably, gross borrowing requirements remain
close to 20% of GDP in 2017, relatively large compared to
rating peers and well above the B-rated median of 10.1%
in 2017. The structure of the central government domestic debt,
which accounts for about half of the total, has improved but continues
to display a relatively short, albeit lengthening, maturity,
with short-term debt accounting for 37% of the total as
of end of March 2017, and a strong reliance on the domestic banking
system, which holds about 60% of domestic debt. The
banking system is adequately capitalized and liquid, but asset quality
remains weak, albeit improving. NPLs stood at a high 18.3%
of gross loans at end-2016. More than half of loans are
denominated in foreign currency, reinforcing asset quality concerns,
as part of these loans are to unhedged borrowers.
RATIONALE FOR STABLE OUTLOOK
The stable outlook balances improving fiscal metrics and reform advances,
against a high public sector debt burden that constrains Albania's
fiscal strength, and structural economic challenges, including
a narrow production and export base, that continue to weigh on the
country's economic strength. Notable progress has also been
made in strengthening the quality of institutions and progress in judicial
reform has improved the prospects for the start of formal EU accession
negotiations. Despite these achievements, institutional strength
remains weaker than similarly rated peers for rule of law and control
of corruption.
WHAT COULD CHANGE THE RATING - UP
Upward pressure on the rating would likely only emerge in the event of
developments which addressed at least two of Albania's key credit
constraints: the small, and undiversified economy; the
high public debt burden; and the country's weak institutions.
A material decline in public sector debt, and further advances in
institutional building resulting in an improved business environment and
competitiveness, would lead to upward rating pressure.
WHAT COULD CHANGE THE RATING -- DOWN
Downward pressure on the rating would arise from a reversal of the fiscal
adjustment and a failure to stabilize the public debt to GDP ratio or
from a reduced political commitment to the institutional and economic
reform agenda. Furthermore, emerging challenges in funding
the current account deficit due to a significant decline of FDI would
be credit negative.
GDP per capita (PPP basis, US$): 11,840 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.4% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.2%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -1.8%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -9.6% (2016 Actual)
(also known as External Balance)
External debt/GDP: 69.9% (2016 Actual)
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 01 August 2017, a rating committee was called to discuss the
rating of the Albania, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/framework, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides certain regulatory disclosures
in relation to the provisional rating assigned, and in relation
to a definitive rating that may be assigned subsequent to the final issuance
of the debt, in each case where the transaction structure and terms
have not changed prior to the assignment of the definitive rating in a
manner that would have affected the rating. For further information
please see the ratings tab on the issuer/entity page for the respective
issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
